After a strong post-Christmas run, shares in Wm Morrison Supermarkets (LSE: MRW) fell by nearly 9% in three days at the end of January.
The trigger for the slide appeared to be a broker note from Sanford Bernstein, which suggested that when the supermarket appoints a new chief executive later this year, he or she could discover that Morrisons’ recovery is not progressing as well as it appears to be.
In turn, this could lead to earnings and dividend guidance being cut, the note warned.
Should we be worried?
There’s no doubt that expectations have tumbled at both Tesco and J Sainsbury after each company’s new boss has started work. However, I’m not sure the risk is as high as Sanford Bernstein’s analysts would have us believe.
Tesco shares fell dramatically after new boss Dave Lewis revealed that profit forecasts had been overstated by £263m. Elsewhere, the fall in Sainsbury’s share price only mirrored the previous decline which Morrisons’ shareholders had already experienced.
In fact, the share price performance of all three supermarkets over the last year has been too close to call: Sainsbury and Morrisons are down by 27%, while Tesco is down 30%.
What could happen?
The obvious risk is that Morrisons’ bold promise to maintain its dividend will be abandoned by a new chief executive.
City consensus forecasts have consistently suggested that a cut is likely.
|
Year |
Dividend |
Adjusted earnings per share (eps) |
|
2013/14 |
13.0p (actual) |
11.9p (actual, restated) |
|
2014/15 |
12.8p (forecast) |
12.2p (forecast) |
|
2015/16 |
10.3p (forecast) |
12.7p (forecast) |
Morrisons’ dividend wasn’t covered by adjusted earnings last year, and isn’t expected to be covered this year. In my view, a cut would be logical.
What about earnings?
In its post-Christmas trading statement, Morrisons confirmed that it expects underlying pre-tax profits of between £335m and £365m for the 2014/15 year, which ended on 2 February.
For Morrisons to miss this forecast now would be alarming, but I think this is unlikely.
No visibility
Of more concern is the year ahead.
Individual analysts’ forecasts for the current year are widely dispersed, ranging from 6.1p per share to 18.7p per share. This is a much wider range than for either Tesco or Sainsbury. This suggests the City feels that visibility of Morrisons’ future earnings is poor — a view that I share.
Morrisons’ sales figures suggest to me that the firm is regaining some of the market share it has lost, and I believe the outlook is reasonably positive. However, we won’t know more until we see the firm’s full-year figures in March.
